Ticker: M
Sector: Services
Industry: Retail (Department
and Discount)
Recommendation: BUY
Pricing
Closing Price $22.34 (4/1/10)
52-wk High $22.40 (4/1/10)
52-wk Low $8.35
Market Data
Market Cap $9.16 B
Shares Outstanding
421.01M
Trading Volume 11.26 M
(3 mo)
Macy’s, Inc.
Valuation
EPS $.82
P/E 26.42
Macy’s, Inc. is a retail company operating stores under the
brands, Macy’s and Bloomingdale’s. The company sells a wide
range of products including men’s, women’s, and children’s
clothing and accessories, cosmetics, home furnishings, and other
consumer goods.
Profitability and
Effectiveness (ttm)
ROA 4.18%
ROE 7.49%
Net Profit Margin 1.49%
Oper Margin 6.19%
Company Overview
The store is broken down into four segments including the
national headquarters, Macys.com, Bloomingdale’s, and
Bloomingdales.com. Macy’s has more than 800 department
stores in 45 states, the District of Columbia, Guam, and Puerto
Rico and 40 upper scale Bloomingdale’s stores in 12 states. Of
these stores, 466 were owned, 263 were leased, and 118 were
operated under conditions were the company owned the
building, but leased the land. Most of the company’s stores are
located around urban or suburban sites across the United States.
In 1994, Macy’s merged with Federated Department Stores,
creating the world’s largest department store company. In 2007,
the company changed names to Macy’s, Inc., leveraging the
world famous Macy’s brand name.
Analyst Name:
Ashley Taube
AMT2M9@mail.missouri.edu
Macy’s, Inc. has over 167,000 employees and over 50 million
customers each year. The company’s national headquarters are
located in Cincinnati, Ohio, with an additional office in New
York.
1
My Macy’s
Macy’s has recently embarked on a new initiative entitled My Macy’s. The project was
developed from customer research, as well as input from store managers, senior division
executives, merchandise vendors, and industry experts. The goal is to improve future sales and
earnings performance in addition to reducing total costs.
Macy’s began the initiative by cutting the original seven regional headquarters to four. This was
eventually cut down to one division. Doing so, they cut 40 percent of their executive workforce.
Their plan is to look at individual stores, instead of entire regions. The company started out with
several test pilot stores. These stores outsold all of the other Macy’s districts. My Macy’s is
now implemented and fully functional in all stores throughout the United States.
My Macy’s allows for more autonomy and efficiency. They will tailor more to local customer
tastes and trends. It will allow the company to focus on selling the right things to the right
people. This will also be better for vendors. Vendors will now be able to respond more quickly
and locally.
By customizing each store by location, Macy’s will be able to try new concepts before expanding
to the rest of the market. For example, embellished sandals were tried out in Florida as a test run
before expanding the footwear to other locations. Test running certain merchandise will allow
the company to better understand the national market on a smaller scale and will also cut out
expenses if things go awry. Focusing on single stores will also allow Macy’s to provide the right
seasonally available items to the right customers.
The initiative saved the company $250 million in the partial year of 2009. $400 million is
expected to be saved each year beginning in 2010.
Expansion
Macy’s, Inc. does not plan on opening many new traditional Macy’s stores this coming year.
Their focus is to increase market share from same store sales. An increase in customer traffic is
expected in 2010. This will aide in some growth.
Although the company does not plan on opening traditional Macy’s stores, they are currently in
the works of adding new Bloomingdale’s outlet stores. Traditional Bloomingdale’s stores are for
wealthier customers. The price point is twice that of Macy’s. However, new outlet stores will
now be opening for those wishing to shop at Bloomingdale’s, but cannot afford to do so. These
stores will first be opened in Florida, New Jersey, and Virginia in high traffic locations. Other
high end competitors, such as Nordstrom’s Rack and Saks Off Fifth, have done well and
Bloomingdale’s is looking to do the same. Four locations have opened, but Macy’s is trying to
2
make sure the size and concept is right before expanding further. They estimate this should not
take much longer than 6 to 12 months.
A new Bloomingdale’s will be opening in Dubai in 2010. This is the company’s first
international store. Macy’s is hoping to use this store as a test run, wanting to see how its brands
translate internationally. By adding this store they will add new shoppers and build international
relations.
Macy’s is also beginning a new customer loyalty program to be released later this year.
SWOT Analysis
Strengths
Economies of Scale – Macy’s is one of the largest department stores in the United States. There
are over 850 stores across the country. The large scale of operations gives Macy’s a competitive
advantage and increased bargaining power. Since they are one of the biggest department stores,
they will be able to make sure they secure the hottest merchandise.
Brand Name – Macy’s is one of the most recognizable brand names in the United States.
Interbrand has ranked the company the 50th most recognizable retail brand. They have had a
three year focus on trying to make themselves known as a ‘master brand.’ Because of this, they
have seen improving financials and increased sales. They have also integrated themselves into
such things as the movie “Miracle on 34th Street” and the Macy’s Thanksgiving Day Parade, the
second most watched event after the Super Bowl.
Strong Product Mix – Macy’s has a wide range of products including apparel, accessories,
cosmetics, and home goods. They have become the sole department store distributor for such
products as the new line of Kenneth Kohl REACTION sportswear, as well as Tommy Hilfiger
and Martha Stewart. This allows Macy’s to serve a diversified consumer base.
Weaknesses
Weak Performance – Macy’s has had a decline in revenue the past three years. This is due to an
economic slowdown and low consumer spending.
Opportunities
Positive Outlook for Online Sales – Macy’s is expanding their website capabilities by making the
websites easier to navigate and more consumer friendly. They have already updated the Macy’s
website and are in the process of working on Bloomingdale’s. This will give the company more
3
potential shoppers by expanding their customer base. Internet sales saw a 27% increase in the
fourth quarter of 2009.
International Growth – Macy’s is opening its first international store in Dubai in 2010. They will
use this as a test to see if they are able to launch themselves into the international market. If the
Dubai store performs well, they will potentially open more stores in other countries.
Cost Control Measures – The launch of the My Macy’s initiative has benefited the company by
saving them an estimated $400 million a year. They are also looking at closing underperforming
stores and cutting certain programs, such as the gift wrapping service, that are not benefiting the
company.
Threats
Economic downturn in the US – Because consumers have less discretionary income, sales have
declined in department stores. The recession has depressed revenue growth and has reduced
margins at Macy’s, as well as all retail stores.
Intense Competition – Even though Macy’s is a large department store chain company, it faces
competitors at national and local levels that compete with individual stores, including specialty,
off-price, discount, internet, and mail-order retailers. Department stores are also becoming
endangered. In 1980, there were 35 major department store names. Now there are only 13 left.
Increasing competition could adversely affect the market share and profitability of Macy’s.
However, the My Macy’s initiative is hoping to counteract this threat, hoping to set itself apart
from its competitors.
Rising Labor Costs – Labor cost is increasing in the United States. Government mandate
increases in minimum wages have gone from $5.85 an hour in 2007 to $6.55 an hour in 2008 to
$7.25 an hour in 2009. Macy’s employs over 167,000 people. Labor amounts for a large portion
of the service industry’s expenses. Increased labor costs could increase overall costs, resulting in
a decrease in profits.
Competitors
Below is a chart of Macy’s compared to its competitors. Macy’s performs above average to very
well on all categories.
Financial
ratios
Valuation
Price
M
Earnings
per share
P/E
ratio
Mkt Cap
26.48
9.18B
1.39B
7.61B
21.81
0.82
SKS
8.65
-0.42
JCP
32.23
1.06
30.53
Current
ratio
Operating metrics
Margins
Return on
avg assets
Return on
avg equity
Return on
investment
Net profit
margin
Gross
margin
Operating
margin
1.55
8.57
40.66
2.44
-0.86
-1.74
11.21
5.94
41.69
11.14
-1.05
-0.57
36.53
-0.57
2.05
6.26
16.96
8.61
3.57
38.20
6.90
4
SHLD
108.92
2.08
52.32
12.51B
1.30
7.11
19.13
11.85
3.48
28.53
5.65
KSS
54.50
3.22
16.91
16.73B
2.29
13.06
22.67
16.41
7.59
36.43
12.71
BONT
13.33
-0.22
247.35M
1.92
17.57
326.15
23.34
7.84
38.16
9.90
DDS
23.78
0.93
1.76B
2.28
6.78
14.05
8.42
4.26
32.98
6.16
0.0010
-1.39
13,296.00
2.42
-11.84
-41.75
-15.61
-8.36
36.58
-5.68
6.39
GOTTQ
WMT
55.64
3.72
RVI
9.63
-1.12
JWN
41.04
2.00
25.60
14.94
20.48
212.00B
0.87
11.35
27.17
17.41
4.28
24.39
471.30M
2.25
-1.78
-27.45
-3.39
-0.88
46.35
2.36
8.95B
2.01
10.54
45.96
15.38
6.52
39.66
11.74
1 year chart- Macy’s vs. Competitors
3 month chart- Macy’s vs. Competitors
5
Although Macy’s was an average performer the past year, the 3 month chart indicates that
Macy’s has stepped up their game, with the national launch of My Macy’s, and has surpassed its
competitors.
1 year chart – Macy’s versus the S&P 500
Furthermore, Macy’s has greatly surpassed the S&P 500 over the past year.
Since Macy’s earning’s announcement in February, they have had an 18.92% gain. The
department store industry has posted a 13.02% gain. This means they have outperformed the
industry as a whole by 45.31%.
Financials
Debt
The company is currently trying to reduce their debt on its balance sheet. On March 31, 2010,
Macy’s repurchased $500 million worth of debt. By deleveraging the company, they expect to
have reduced interest expense. Last year, even after paying off $950 million in debt, they ended
up increasing cash by $300 million.
Sales
Fourth quarter 2009 sales were down by .8%. However, this is better than the 1% to 2%
decrease analysts were expecting. This is also better than the third quarter, where sales were
down 3.6%. This acceleration trend is encouraging for the company. Despite analysts’ opinions
6
that sales were supposed to go down by .2% in February 2010, sales rose .3%. This is even after
the abundance of snowstorms during the month. Without these storms, it is projected that sales
could have gone up 5%. This increase suggests that recovery from the recession is gaining
momentum. Macy’s has 17% of its stores in California, which was the hardest hit area of the
country. Sales in this state are now leveling off, another indicator that the recession could be
ending. They are also seeing that consumers are more willing to buy their brands as long as the
price relationship is fair. Sales are expected to increase in 2010.
The company has also had a home furnishings trend improvement. As people start to buy new
homes, they are likely to upgrade their furnishings. The furniture and home good sections have
greatly benefited from this.
Cash Flows
Cash flows for the company were strong. The net cash provided by operating activities was only
$116 million below a year ago on $1.4 billion lower sales. The offset is from reduced capital
spending and higher asset sales.
Inventory Management
Macy’s is working on having better inventory management. Retail stores do not want to have
high amounts of inventory, because fashion changes with time and seasons. The company had
3% lower inventory than last year. This means that the company will not have to dramatically
mark down merchandise to move their products. The fast turnaround means that they can have
less and sell more.
Earnings
Macy’s earned $1.40 per share the fourth quarter of 2009. The company had already raised their
standards to $1.32, but once again surpassed expectations.
Expenses
There has been some debate of whether or not Macy’s will incur more expenses from Simon
Property Group purchasing General Growth Properties. However, Macy’s has stated that their
rents are very low and there is nothing to be concerned about. Malls need them as an anchor to
draw customers into smaller stores.
Most of Macy’s capital expenditures are not spent on new stores. They are spread between
technology, maintenance, and small remodels.
7
Put/Call Ratio
On March 19, 2010 Macy’s, Inc. had a low put/call ratio of .15 and a 90 day record high call
volume. This implies that investor sentiment is bullish for the stock based on the large amount
of call options.
Dividends
Dividends are not a big part of Macy’s structure. The company issued $.20 in dividends per
share last year.
Valuation
For the valuation, I used the Two-Stage Discounted Free Cash Flow Model (aka Warren Buffett
Way Owners’ Earnings Discount Model). Using a 10% discount rate and a 7% growth rate,
Macy’s intrinsic value came to be $36.76 per share. Macy’s stock is currently trading around
$22.
First Stage Growth Rate
4%
5%
6%
7%
8%
9%
10%
10%
$29.54
$31.77
$34.17
$36.76
$30.56
$42.57
$45.81
Discount Rate
11%
12%
$26.02
$23.29
$27.91
$24.92
$29.95
$26.68
$32.14
$28.57
$34.50
$30.60
$37.04
$32.78
$39.77
$35.12
13%
$21.12
$22.55
$24.08
$25.73
$27.50
$29.40
$31.43
14%
$19.35
$20.61
$21.97
$23.42
$24.98
$26.65
$28.44
15%
$17.88
$19.01
$20.22
$21.51
$22.90
$24.39
$25.98
Assuming a higher discount rate, the intrinsic value mainly continues to be higher than the
current share price. The intrinsic value becomes more questionable as the discount rate becomes
higher and the growth rate becomes lower.
Conclusion
Macy’s is moving in the right direction to put itself in a position for future growth and profits.
The My Macy’s initiative will hopefully set Macy’s apart from the rest of department stores and
will boost future performance. The plan to add outlet stores and its first international store will
also give Macy’s potential for more future expansion. Macy’s is also trying to make its balance
sheet better by deleveraging itself and improving its inventory levels. This will result in fewer
expenses for the company. Macy’s also appears to be undervalued. The company is performing
8
well against its competitors and has surpassed analysts’ expectations. The Macy’s brand is a
name that should continue to do well in the future.
9
Income Statement
In Millions of USD (except for per share
items)
Revenue
Other Revenue, Total
Total Revenue
Cost of Revenue, Total
Gross Profit
Selling/General/Admin. Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense(Income) - Net Operating
Unusual Expense (Income)
Other Operating Expenses, Total
Total Operating Expense
Operating Income
Interest Income(Expense), Net NonOperating
Gain (Loss) on Sale of Assets
Other, Net
Income Before Tax
Income After Tax
Minority Interest
Equity In Affiliates
Net Income Before Extra. Items
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
Preferred Dividends
Income Available to Common Excl. Extra
Items
Income Available to Common Incl. Extra
Items
Basic Weighted Average Shares
Basic EPS Excluding Extraordinary Items
Basic EPS Including Extraordinary Items
Dilution Adjustment
Diluted Weighted Average Shares
Diluted EPS Excluding Extraordinary Items
Diluted EPS Including Extraordinary Items
Dividends per Share - Common Stock
Primary Issue
Gross Dividends - Common Stock
Net Income after Stock Based Comp.
Expense
Basic EPS after Stock Based Comp.
Expense
Diluted EPS after Stock Based Comp.
Expense
Depreciation, Supplemental
Total Special Items
Normalized Income Before Taxes
Effect of Special Items on Income Taxes
Income Taxes Ex. Impact of Special Items
Normalized Income After Taxes
Normalized Income Avail to Common
Basic Normalized EPS
Diluted Normalized EPS
52 weeks ending
52 weeks ending
53 weeks ending
53 weeks ending
2010-01-30
2009-01-31
2008-02-02
2007-02-03
23,489.00
24,892.00
26,313.00
26,970.00
23,489.00
24,892.00
26,313.00
26,970.00
13,973.00
15,009.00
15,677.00
16,019.00
9,516.00
9,883.00
10,636.00
10,951.00
8,062.00
8,481.00
8,554.00
8,487.00
391.00
5,780.00
219.00
628.00
22,426.00
29,270.00
24,450.00
25,134.00
1,063.00
-4,378.00
1,863.00
1,836.00
-556.00
-
-
-
507.00
350.00
350.00
350.00
-
-4,938.00
-4,803.00
-4,803.00
-4,803.00
-
1,320.00
909.00
909.00
893.00
-
1,446.00
988.00
988.00
995.00
-
350.00
-4,803.00
909.00
988.00
350.00
-4,803.00
893.00
995.00
423.20
0.83
-
0.00
421.20
-11.40
-
0.00
451.80
2.01
-
0.00
547.70
1.80
-
0.20
0.53
0.52
0.51
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.46
-2.48
2.35
2.59
10
Balance Sheet
In Millions of USD (except for per share items)
Cash & Equivalents
Short Term Investments
Cash and Short Term Investments
Accounts Receivable - Trade, Net
Receivables - Other
Total Receivables, Net
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
Property/Plant/Equipment, Total - Gross
Accumulated Depreciation, Total
Goodwill, Net
Intangibles, Net
Long Term Investments
Other Long Term Assets, Total
Total Assets
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital Leases
Other Current liabilities, Total
Total Current Liabilities
Long Term Debt
Capital Lease Obligations
Total Long Term Debt
Total Debt
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred Stock, Total
Preferred Stock - Non Redeemable, Net
Common Stock, Total
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Treasury Stock - Common
Other Equity, Total
Total Equity
Total Liabilities & Shareholders' Equity
Shares Outs - Common Stock Primary Issue
Total Common Shares Outstanding
As of 2010-01-30 As of 2009-01-31 As of 2008-02-02 As of 2007-02-03
1,686.00
1,385.00
583.00
1,211.00
1,686.00
1,385.00
583.00
1,211.00
358.00
360.00
463.00
517.00
358.00
360.00
463.00
517.00
4,615.00
4,769.00
5,060.00
5,317.00
223.00
226.00
218.00
251.00
0.00
126.00
6,882.00
6,740.00
6,324.00
7,422.00
16,130.00
16,044.00
-5,139.00
-4,571.00
3,743.00
3,743.00
9,133.00
9,204.00
678.00
719.00
831.00
883.00
490.00
501.00
510.00
568.00
21,300.00
22,145.00
27,789.00
29,550.00
693.00
274.00
294.00
242.00
966.00
666.00
650.00
1,586.00
1,532.00
3,727.00
5,151.00
4,454.00
5,126.00
5,360.00
6,095.00
8,456.00
8,733.00
9,087.00
7,847.00
8,456.00
8,733.00
9,087.00
7,847.00
8,698.00
9,699.00
9,753.00
8,497.00
1,068.00
1,119.00
1,446.00
1,652.00
2,621.00
2,521.00
1,989.00
1,702.00
16,599.00
17,499.00
17,882.00
17,296.00
5.00
6.00
5,609.00
9,486.00
7,032.00
6,375.00
-2,557.00
-3,431.00
4,701.00
4,646.00
-182.00
-182.00
4,701.00
4,646.00
9,907.00
12,254.00
21,300.00
22,145.00
27,789.00
29,550.00
421.01
420.08
419.75
496.92
11
Statement of Cash Flows
In Millions of USD (except for per share 52 weeks ending 2010- 52 weeks ending 2009- 53 weeks ending 2008- 53 weeks ending 2007items)
01-30
01-31
02-02
02-03
Net Income/Starting Line
350.00
-4,803.00
893.00
995.00
Depreciation/Depletion
1,210.00
1,278.00
1,304.00
1,265.00
Amortization
Deferred Taxes
96.00
-291.00
-2.00
-18.00
Non-Cash Items
444.00
5,796.00
271.00
472.00
Changes in Working Capital
-350.00
-114.00
-228.00
1,032.00
Cash from Operating Activities
1,750.00
1,866.00
2,238.00
3,746.00
Capital Expenditures
-460.00
-897.00
-1,105.00
-1,392.00
Other Investing Cash Flow Items, Total
83.00
105.00
309.00
2,568.00
Cash from Investing Activities
-377.00
-792.00
-796.00
1,176.00
Financing Cash Flow Items
0.00
-18.00
-19.00
44.00
Total Cash Dividends Paid
-84.00
-221.00
-230.00
-274.00
Issuance (Retirement) of Stock, Net
7.00
6.00
-3,065.00
-2,118.00
Issuance (Retirement) of Debt, Net
-995.00
-132.00
1,244.00
-1,611.00
Cash from Financing Activities
-1,072.00
-365.00
-2,070.00
-3,959.00
Foreign Exchange Effects
Net Change in Cash
301.00
709.00
-628.00
963.00
Cash Interest Paid, Supplemental
594.00
600.00
Cash Taxes Paid, Supplemental
432.00
561.00
12